The age of reason
14 November 2005
Legislation on age discrimination is tabled to come into force in October 2006. The current draft of the legislation rocks the foundations of legal partnerships as we know them. While most partnerships are based fundamentally on hierarchy, the new legislation calls that system into question.
Under the draft, any compulsory retirement ages contained in partnership agreements will be unlawful unless capable of objective justification. Hopefully, the final regulations will amend this, so that the exemption granted to allow a default retirement age of 65 for employees is extended to partners.
However, the retirement age of 65 may be a red herring. Most law firms currently have retirement ages of between 60 and 65, yet many partners leave the profession well before their time.
The reasons are numerous. Partners in their fifties may feel it is the acceptable thing to do. They may be sitting comfortably, having banked considerable earnings over many years, and want to leave the pressures of a lawyer's life. Another, and in light of the legislation more problematic, reason is that partners aged 50-plus are pressured to leave as their share of the profits through the lockstep system is disproportionately high compared with their billings.
It is partly this pressure that the legislation seeks to alleviate. Economics aside, the Government hopes that by making it easier for older workers to remain in employment, people will learn to better appreciate their experience, wisdom and steadying presence. But the current draft of the legislation is ill-fitted to partnerships and may compound the very pressure it seeks to redress.
Partners often share their profits through a lockstep system, which is based on the number of years of service. On average, it takes 10 years from being placed on the first rung of the lockstep ladder to reach the top, known as plateau, when partners are likely to be in their mid to late forties.
Plateau partners could at one time feel they had 'made it'. Yet in today's cost-cutting and profits-pressured environment, law firms often look at the plateau partners to weed out those who are perceived as 'dead weight'. In an ever fiercer market, the performances of those partners approaching plateau are also coming under scrutiny.
While some partners view early retirement as an opportunity for change, others feel it is a slap in the face from the firm they have worked so hard to serve. It is from this latter group that law firms are likely to come up against age discrimination claims.
The lockstep system has been the very fabric of partnerships for many years. It has been adopted widely by law firms as it recognises partners' levels of experience, allows the ownership of the business to be handed over gradually to its longest-serving members and encourages partners to share their work, contributing to the overall goodwill of the firm.
These reasons go some way to establish a legitimate aim required by the age discrimination legislation, but the law firm still needs to show that the means are proportionate. This is a tall order, not least when comparisons to other law firms will be drawn. Without a proper exemption from the legislation, the legitimacy of the lockstep system in a partnership agreement, in a similar way to restrictive covenants, may fall to be assessed individually by the courts, which leaves the partnership itself in a state of uncertainty.
If lockstep becomes a thing of the past, partnerships will be presented with a new dilemma - what new mechanism will govern profit-sharing? The suggestion that partners of large law firms share their profits equally will not be warmly received by those who have contributed much to the firm's goodwill, especially those on the brink of plateau. Alternatively, if profit-sharing is based on contribution, this will lead to a difficult transition period for firms which have historically used a lockstep system, not to mention the future difficulties of assessing each partner's profit share fairly.
The younger generation
It is not only the older partners who are affected by the legislation. The lockstep system indirectly discriminates against younger equity partners, particularly those whose billings disproportionately exceed their share of the firm's profits. The new legislation may provide a young partner with a claim that these arrangements are unlawful on grounds of age. If successful, all equity partners at the same or lower level could also bring claims against the partnership, leaving the courts to assess the appropriate remedy, which may see older partners paying back their excess share.
And the impact of the legislation does not stop at partners, but extends to associates, particularly those seeking to join the partnership. Some law firms set a minimum level of post-qualification experience (PQE) before being considered for partnership.
While such a requirement may seek to satisfy a legitimate aim, the firm still faces the issue of proportionality. Where one firm considers seven-years' PQE sufficient, but another firm insists on 10-years' PQE, the latter firm may struggle to persuade a tribunal that the level set was necessary. This uncertainty for the partnership is undesirable and will not be removed unless an exemption is included in the final regulations. Whatever happens, law firms will be forced to reassess this practice to attempt to avoid acting unlawfully on grounds of age.
Pressure at the top
With pressures on promotion of associates and incentivising young partners, law firms are finding it increasingly difficult to maintain the balance between the older and younger generations. This age discrimination legislation is an opportunity for law firms to assess the fundamental basis of their structure. It is no mean feat for a partner of a firm to reconcile potentially conflicting duties of good faith to younger and older partners with those of the firm itself. How one tackles this will remain unclear until the new regulations appear in final form, but what is certain is that if the firm does not get it right, both the young and old will be given a platform to challenge the system.
What happens next?
The consultation on the draft age discrimination regulations ended on 17 October and the final regulations are expected early next year. It will be interesting to see whether the legislation will be adapted to take into account the partnership structures such as the lockstep and apply exemptions, such as default retirement age. If it does not, there are uncertain times ahead. There is no escape for law firms which have converted to LLPs either, as the regulations apply to members of LLPs in the same ways as partners in a general partnership. n For years, the majority of UK law firms have not required incoming partners to pay for goodwill, but have skewed profit-sharing towards those who have been partners the longest. Now there are forces at play - age discrimination, the Clementi reforms and tax - which could signal the end of lockstep and the return of payments for goodwill in some firms.
Alan Watts is a partner and Hayley Evans an associate at Herbert Smith